Abstract
Models of valuation that are used for large publicly traded firms include those relying on market information such as the equity price of stocks or shares; those that rely on the financial valuation of assets; and, those that are cash flow and/or earnings based (including earnings multiples, capitalization, and discounted cash flow approaches) (Hasso and Duncan, 2013; Anderson, 2009; Petersen, Plenborg and Schøler, 2006). The income approach (or discounted cash flow (DCF) approach) and the market approach (e.g. price earnings ratio) are equally popular as the primary valuation methodologies used by large incorporated businesses in Australia (KPMG, 2015, p.8). The Research Project Drawing on the preceding background, two major areas of study have been identified as the focus of this research project: (1) How are valuations of privately held firms determined in practice? - Which methods do professional valuation experts use? - Do they "normalise" income and cash flow projections and, if so, how? - If necessary, how do they determine risk premiums and discount rates? - What adjustments do they make for firm specific circumstances and/or lack of marketability? (2) How much variability exists in the valuation of privately held firms? - Are members of the valuation profession able to overcome difficulties such as those outlined above and determine valuations that are reflected in actual trade (sale of valued enterprises)? Many owners of privately held companies are confronted with the need to establish a value for their own business for a variety of reasons such as to sell their business, buying out a partner, legal and tax planning, insurance coverage, bank loans acquisition, employee stock ownership plans, divorce or death.